Low-risk investing within equities and other asset classes has received a lot of attention over the past decade. An intensive academic debate has spurred, and been spurred by, the growing market for low-risk strategies. This article presents five fact and dispels five fictions about low-risk investing. The facts are: Low-risk returns have been
- strong historically,
- highly significant out-of-sample,
- robust across many countries and asset classes, and
- backed by strong economic theory, but, nevertheless,
- can be negative when the market is down.
The fictions that this article dispels are that low-risk investing
- delivers weaker returns than other common factor premia,
- is mostly about betting on bond-like industries,
- is especially sensitive to transaction costs and only works among small-cap stocks, and
- have become so expensive that they cannot do well going forward. Lastly, the article dispels the fiction
- that CAPM is dead and so is low-risk investing – this statement is a contradiction; If the CAPM is dead, then low-risk investing is alive.